Coffee Stocks Are Hot Again

Peet's Coffee & Tea (NAS: PEET) agreed this morning to be taken private by Joh. A. Benckiser in a $1 billion deal. Shareholders will be cashed out at $73.50 a share, a nearly 29% premium to where the stock closed last week.

The shares opened at $73.50 and quickly went on to trade as high as $74.25. The movement indicates that investors believe a bidding war may break out, but that doesn't seem likely. The board unanimously approved the deal, and it's going to be hard to smoke out a higher offer than the only one on the table that valued Peet's at a whopping 42 times this year's projected earnings and 32 times next year's bottom-line target.

The smarter play at this point would be in snapping up the other names in premium coffee as potential buyout fodder, but you're probably too late to dabble in those sympathy plays.

Even though the market opened sharply lower this morning, shares of Coffee Holding (NAS: JVA) , Caribou (NAS: CBOU) , and Green Mountain Coffee Roasters (NAS: GMCR) all moved higher at the open.

Starbucks (NAS: SBUX) is the only java heavy to open lower, and rightfully so. No one is taking Starbucks private. The market darling is more likely to be a buyer -- as it has over time -- than to be on the block itself.

Cynics will argue that investors are wrong to be chasing the premium coffee specialists, but the valuations are certainly tempting. If Peet's is worth 32 times next fiscal year's earnings, how outlandish can Coffee Holding, Caribou Coffee, and Green Mountain be at multiples of 7, 19, and 6, respectively.

Coffee Holding and Green Mountain may be fetching forward multiples in the single digits, but they're growing faster than Peet's. Coffee Holding even pays a quarterly dividend as patient investors wait things out.

Naturally, investors shouldn't buy into any stock solely for the buyout potential. However, if the valuations are compelling enough to believe that individual players will do just fine on their own -- especially in light of a generous buyout that elevates the perceived value of the niche itself -- sympathy plays can be smart plays.